Specific gifts to non-exempt beneficiaries which are expressed to be free of tax
A specific gift of property to non-exempt beneficiaries. The Will is silent as to whether the gift is subject to IHT
A clause expressly stating that IHT is to be paid from the estate as a testamentary expense, the remainder then being defined as the residuary estate
A division of the residuary estate between various charities
Where will the burden of IHT fall? My understanding is that, where the Will is silent on whether a gift is free of IHT, the presumption is that the gift is free from IHT. Does this mean the executors would pay the IHT from the estate, effectively reducing the residuary estate and the amount passing to charity? Is this permitted under section 41 IHTA?
Sounds right to me. S.41(a) is not engaged: none of the specific gifts is exempt. S.41(b) is not either though the opaque wording could be better expressed. It is dealing with respective shares of residue where one or more is exempt and one or more is not: it does not prevent the quantum of residue from being reduced or even exhausted by IHT payable even if, as here, it is wholly exempt.
Residue is what is left net of,inter alia, IHT: this provision is designed to overturn the normal rule that shares of residue are of that net amount. Where residue is shared between exempt and non-exempt legatees the IHT is in effect ignored, the shares then calculated and the entire tax is charged on the non-exempt share only. See IHTM2602-3 but which do not answer the question: what if the tax exceeds the value of the non-exempt share of residue? One inference is that s.41(b) diverts the excess to the specific gifts.
IHTM26061 deals with the situation in the OP: the only gifts are specific, non-exempt and not bearing their own tax (because the Will either so directs or is silent). Grossing up of their value is required: s.38(1)(4). HMRC call this the simple version of it! This will increase the IHT payable compared with the position if the gifts were made subject to tax by the Will, which tax law will respect. (Grossing up will not be needed if the total value-HMRC call this the “starting value”-of all the non-exempt gifts are within the available NRB/RNRB including transferables).
The absolute golden rule is that this total calculated chargeable value of gross gifts cannot exceed the value of the s4 transfer ignoring any exemptions. If it does the value of the specific gifts must be abated rateably and the total value chargeable to tax reduced. That tax would fall on residue under general law but because of s.41(b) it falls on the specific gifts proportionately since the residue is wholly exempt: IHTM26071 and s.37. This can however result in no residue at all! Fewer tears may be shed over charities that consequently miss out but this can be a severe outcome if it is wholly unexpected and the loser is the surviving spouse.
(Note for fellow nerds: the possible bizarre outcomes in IHTM26085-6 and 26127).
So s.41(b) does not necessarily mean that a gift of the entire residue to an exempt beneficiary is a guarantee that there will be any residue. There is a risk that, although the maximum effective rate of IHT on the s.4 chargeable value is 40%, while stocks last, grossing up can increase the tax payable which will fall on residue in effect even if it is in principle wholly exempt; if it exhausts residue HMRC is still going to get the tax from somewhere so the tax has to be recovered rateably from the specific legatees. There is a good example at 26122 although it uses a pecuniary legacy rather than a specific gift of an asset.
All this points up two Cinderella aspects of tax-efficient estate planning:
Specific gifts of high value which are not directed to bear their own tax can by grossing up increase IHT payable and diminish or exhaust residue.
Such gifts, even if made subject to tax, may have to be sold to pay it and sometimes to pay tax on other gifts, even of residue, where the estate is highly illiquid.
In my experience it is far from uncommon to find that the deceased was not made fully aware of these when making the Will. Soon pension pots will exacerbate the problem as some will contain assets that are not readily realisable and the very limited warning of the unexpected change in the law fails to address this by any transitional indulgence.
Yes, that right. The IHT is payable by the residuary estate before it is divided between the charities.
As a warning to anyone who writes wills; this is even more difficult when you have mixed legacies and mixed residuary beneficiaries.
I have always worked on trying to avoid having a Will with both exempt and non exempt legacies (or subject to tax and free of tax) AND exempt and none exempt residuary beneficiaries. The residue estate pays the whole of the tax on the grossed up legacies, and only after can you divide the residue between taxable and non taxable res bens - and how depends on the Benham/Radcliff option taken. The calculations are horrendous and making the beneficiaries understand them is worse. Best to be avoided in the drafting stage if at all possible.